As I have read the news over the last year, I have become increasingly alarmed. Our world is headed for some tremendous problems that will have cataclysmic effects on Western society and only a handful of people seem to be aware of the coming storm. I decided to write this blog post to add my voice to the list of people who are trying to warn others of the economic tsunami that is about to hit the United States and the world. Let us go through the issues one at a time.

The Fundamental Instability

The fundamental problem is that United States is spending too much money. Over the last ten years, the United States government has added 10.5 trillion dollars to the national debt. This is $30,000.00 worth of debt for every man, woman and child in the United States. This decade long splurge made our total national debt more than 17 trillion dollars.

But the national debt is just the tip of the iceberg. According to Boston University professor of Economics Laurence Kotlikoff and more than 1200 economists including 17 Nobel Prize laureates, the total indebtedness of the United States includes “unfunded liabilities” that makes the total as much as 200 trillion dollars or more than $600,000.00 for every man, woman and child in the United States. While these numbers are horrific and make the United States in worse shape per capita then Greece, they don’t include state and local governments, personal businesses and individual debt. Economic earthquakes occur when the markets correct imbalances of this kind and this debt problem is an economic earthquake waiting to happen.

International Tensions and Possible Triggers

This fundamental instability in the U.S. economy would not necessarily be a short term problem if it were not for other factors. The United States government is, after all, the most powerful institution in the history of the world and its dollar has many powerful supports that have made it stable for decades despite the awareness of these long term issues. The term “petrodollar”, for example, refers to the agreement between the United States and Saudi Arabia made during the wild currency fluctuations of the 1970’s whereby Saudi Arabia stabilized the dollar by requiring oil purchases be made using dollars. Similarly, numerous international institutions have matured during the era of dollar dominance and made the U.S.dollar the defacto standard for international trade and commerce. The stock and commodities markets in London, New York and Chicago, the International Monetary Fund, the World Bank and the SWIFT system for settling international transactions are all controlled by Western powers and ensure the absolute stability of the stable of competing fiat Western currencies.

Recently, however, the world powers not represented in London, New York, Chicago, Paris and Brussels have decided to challenge Western supremacy. These BRICS (Brazil, Russia, India, China and South Africa) nations have determined to set up alternatives to the Western institutions that have controlled international trade for decades. The Chinese alternative to the SWIFT system, for example, goes online in September of 2015 and is called the CIPS system. This system will allow international trade without interference and monitoring from the Western powers. Similarly, non-Western analogs to the World Bank, International Monetary Fund, and the various commodities and stock markets have emerged and are growing in global significance. In this emergence of non-Western institutions for trade and commerce we see two trains on a collision course.

The central reason for the coming collision is the effect of printing 10 trillion dollars in the last decade. If the medium of global exchange is the dollar and the United States prints ten trillion dollars, this means that the currency reserves of all the other nations were essentially reduced in purchasing power. If government A has one trillion dollars in currency reserve and the global supply of dollars is five trillion dollars, government A has 20% of global purchasing power. If the United States prints an additional ten trillion dollars, government A now has ~ 6% of global purchasing power. When the United States prints dollars, it is as though it were taxing other nations in order for them to participate in international trade and commerce.

Of course, many other reasons exist for dissatisfaction with the United States. The Russians are angry over NATO’s interference in the former Warsaw Pact nations and Ukraine. Saudi Arabia is so angry that the United States has decided to ally with Iran and allow it to have a nuclear weapon that they skipped Barrack Obama’s peace summit and have entered into negotiations with Israel. Many Muslim nations regard the United States as a hostile nation because of its drone strikes in Pakistan, Yemen and Afghanistan. The nation that represents the most dangerous and powerful challenge to Western authority, however, is China.

The NATO relationship with China has been cold since the U.S. bombed a Chinese embassy in 1999 and have recently escalated over island bases that China is building in international waters in the Pacific. China is an ascending power and has recently surpassed the United States as the world’s largest economy. Because of their one child policy and their cultural preference for sons over daughters, China has a large male population and history shows us that such a nation is going to be more belligerent. China has a large amount of dollars in its currency reserve and is the nation most effected by irresponsible U.S. spending. China is also uniquely positioned to become the world’s global superpower within the next year. All it will take is a good hard push.

The Coming Death of the U.S. Dollar

In the sketch of current world affairs drawn above, we have shown that the United States is precariously balanced on the edge of economic collapse and is at the same time throwing its weight around in global politics and taxing nations that depend on international dollar currency reserves with irresponsible spending. We have also shown that there are a group of nations that are tired of the bullying and abuse and are about to fight back. This coming fight is going to seismically shift the geopolitical powers in the world and trigger an economic earthquake. What is going to happen?

Sometime soon, the Chinese will have completed their preparations and will stop supporting the U.S. dollar. After they unveil their stockpiles of precious metals this October as part of their bid to be included in the basket of SDR currencies at the IMF, they will sever the tie between the Yuan and the dollar and announce that the Yuan is backed by gold and that they are selling trillions of dollars in U.S. treasuries. The result of these actions will be a run on the dollar and hyperinflation in the United States. If the Chinese have been smart and denominated their corporate debt in dollars on the international market, their private sector will then be able to buy dollars for a pittance and emerge debt free. The net result will be an impoverished United States and a China that has the largest economy in the world, the strongest currency in the world and a debt free private sector. China will have replaced the United States as the global economic and military superpower without firing a shot in anger.

The party starts this September.

**AMENDMENT**

I was talking to a taxi driver the other day and he said that China could never do what I have outlined above because they would have nobody to “buy their stuff”. I explained to him the problem with his thinking using the following thought experiment. Suppose a starving baker was selling 10 cakes a month to a formerly rich person who had fallen on hard times. When this person could no longer pay, he began to give the baker IOUs with the promise that when his fortunes turned around, he would pay the baker back. How long does the baker, whose own family only eats rice, dutifully take the cakes to the rich man in exchange for IOUs? A year? Ten years? Twenty years? If China allows the Yuan to float the living standards of its own people will increase and they will be able to afford to consume things they cannot currently afford. The baker will eat the cakes he has been taking to the fallen mogul himself and increase his standard of living while the poor man will realize that he is a pauper when he has nothing to eat.